What To Pay An M & A Advisor

As expected, the issue of fees in M&A transactions is raised quite frequently by clients.  “Indeed, selling a business will result in different types of fees and taxes,” says Achim Neumann, President, A Neumann & Associates, LLC, a New Jersey based Mergers & Acquisitions advisory and Business Brokerage firm, “and at the end there are commonly three deductions.”

First, a seller typically pays an upfront fee for a valuation ofthe business. Short of a retainer scenario where the valuation is generated by the M&A advisor firm out of a retainer fee – somewhat a conflict of interest – a business owner will have usually a third party, accredited valuation firm establish a value for the company to be sold.

Upon closing, there is the cost of taxes to be paid by the business seller. This can be significant, depending on the type of transaction (Stock vs. Asset) and the type of company (LLC vs. Corporation). A qualified CPA can establish a tax estimate for the seller once a valuation has been put into place with an approximate deal size and structure. Early planning for a sale of a business will go a long way in reducing potential taxes.

Finally, there are the fees for the M & A Advisory / Business Brokerage firm. Essentially, there are two types of fees for M&A Advisory firms 

• back-end fee (contingency fees due upon deal closing) 
• retainer fees (upfront fees)

Generally speaking, back-end firms collect their fees at the closing table upon completion of a transaction. Accordingly, they typically cover the upfront expenses of preparing and selling a business – often amounting up to $40,000+ in the lower mid-market – and only work with rigorously written engagement agreements to ensure that fees are paid at the end and said upfront fees are recovered.  Accordingly, they are allowing for few changes to their engagement agreement with a business seller.

Alternatively, there are retainer M&A firms which typically capture a hefty upfront fee (very much like attorneys), typically, for a third of the commissions, payable over the initial engagement period. Needless to say, given that the significant upfront expenses of marketing the business are somewhat mitigated by the retainer, it allows for lesser stringent engagement agreements. However, such firms might not have the same ‘motivation’ to sell – given the fees were already captured.

“From our end, we are indifferent to what type of agreement a seller choses, but we know that most business owners prefer a non-retainer scenario, “ says Neumann, “at the end both parties need to be comfortable with the arrangement.”